NASA OIG: NASA's Use of Award Fee Contracts

NASA Inspector General Paul Martin today released a report that examines NASA's use of award fee contracts to motivate contractor performance and improve acquisition outcomes. An award fee is a predetermined amount of money contractors can earn based on their performance. In fiscal year (FY) 2012 alone, NASA spent approximately $15.1 billion on contracts, $7.1 billion of which contained award-fee provisions.

The Office of Inspector General (OIG) found that shortcomings with NASA's award fee practices, including use of overly complex formulas to calculate the fees and a clause designed to hold contractors accountable for the quality of the final product that disregards interim performance evaluations, have diminished the effectiveness of NASA's use of award-fee contracts.

In 26 of the 45 contracts we reviewed, we found erroneous award-fee payments totaling $66.4 million. We found that these errors resulted from NASA policy requiring the use of complex mathematical formulas to calculate interim and provisional payments. Although NASA has the opportunity to fix these errors as part of the final award-fee calculation, these funds are not available for NASA's use until corrected.

The OIG also determined that NASA applies a clause to end-item contracts - contracts for delivery of a part or scientific instrument such as a sensor for a satellite - that allows the contractor to earn award fees in the final evaluation even though the Agency determined the contractor's performance did not merit the full award in prior evaluation periods. The OIG contends this practice circumvents a Federal procurement rule that prohibits "rollover" of unearned fees to subsequent performance periods and promotes what is commonly known at NASA as the "Hubble psychology" - an understanding that as long as a project ultimately works as intended NASA will overlook cost and schedule overages that occurred during its development.

The OIG also identified questionable evaluation and acquisition practices that resulted in NASA paying $2.4 million in award fees that may not have been warranted, including combining award-fee periods and assigning ratings unsupported by technical, cost, and/or schedule performance data. Furthermore, NASA failed to ensure that contracting officers submitted appropriate data to measure the effectiveness of award-fee contracts - a shortcoming that affects the Agency's ability to correct ongoing deficiencies and evaluate the appropriateness of award-fee contracts in future acquisitions.

To improve NASA's use of award-fee contracts, the OIG made 12 recommendations including that NASA simplify award-fee payment formulas; implement a process to test the accuracy of award fee calculations; provide additional training on award-fee payment calculations; and revise policy to prevent contractors from receiving fees NASA determined their performance did not merit in previous periods. NASA concurred with 5 of the recommendations but disagreed with 7 others, including the suggestion to simplify the award fee formulas and our concerns about "rollover" of award fees. The OIG will continue to work with the Agency to resolve these open recommendations.